How to be Ready for a Phase I ESA Recognized Environmetnal Condition (REC)

fenced cleaners cleanup

These days, a Phase I Environmental Site Assessment (ESA) is usually part of any commercial property transaction. The reasons are clear, a handshake won’t do. But, there are potential consequences, like the discovery of a recognized environmental condition (REC) on your site. Here is a story that illustrates that.

The Family Investment - Part I

I got a call from a colleague of a former client, “Hi, I’m wondering if you can help me. I got your contact information from Bill, you helped him with a commercial property in RIchmond.” After getting familiar with each other, the conversation turned to the question that prompted the call.

“My family owns a strip mall with 5 units. Recently, I started the process of refinancing my loan on the building. My loan was coming due and I wanted to replace my existing loan for a loan with better rates. The bank I settled on required a Phase I ESA as part of the process.” Frank went on, “The ESA found that I had a REC. I knew there was a dry cleaner in one of the building’s units, but I was under the impression that the business was a collection point for off-site dry cleaning. The ESA indicated a REC because of historical records stating a dry cleaner operated at the address.”

“Okay,” I replied, “What can I help you with?”

“Well, is there any way you can get the people that produced the Phase I to change their conclusion? If they knew that the dry cleaning business was just a collection point and not the location of actual dry cleaning, they could change their conclusion.”

 “Alright, Let me look at your Phase I and we’ll see what we can do.”

In this case, Frank’s Phase I ESA was a semi-automated form-driven document reviewed and approved by a licensed professional. It contained all the right pieces of information. Just as Frank had said, the Phase I disclosed a historical directory that showed the property was once the location of a dry cleaner. A printout of the information was provided in an attachment. There was no previous Phase I ESA referenced for the site. It was time to give Frank a call.

I got Frank on the phone and gave him a quick summary of what I found. “I can’t see a way that we can get them to change their conclusion unless you have some information that shows that the site was exclusively a drop-off point, ” I told him. He was not pleased, but wouldn’t give up.

“Is there anything else I could do?” Frank asked.

“Look, you could try a records search at the county. Maybe there’s some more information about the property that didn’t show up in the Phase I,” I said. After a bit more about a records search at the county, we signed off.

The Family Investment - Part 2

Frank called me about a week later. He told me he did find more information and shared his findings. Unfortunately, the records showed the site had been the location of an operating dry cleaner since 1939, and that the drop-off dry cleaner only operated for a couple of years. This revelation changed everything.

“So there’s no doubt a dry cleaner operated at our property,” Frank told me, and asked, “what are the possible consequences?”

“For one thing, there’s no reason to change the Phase I ESA you had before. It might not have been as thorough as your efforts, but it was good enough for the bank,” I said. “Now the bank will want a Phase II investigation to assess the REC.”

How much would that cost?” Frank asked. I told him an investigation would cost between $15,000 to $25,000, and if the REC was verified, his family would be named the responsible party for contamination at the site. I continued, “Depending on the severity of the contamination, you could be responsible for up to  $600,000 in cleanup costs and 10 years of effort. On the flip side, a Phase II investigation might not find anything.”

Frank was not reassured and pushed on, “So, what are my options?”

“Well, to continue pursuing a loan at this bank, you will need to complete an investigation. That would cost a lot of money and might turn out bad if the REC is verified. Considering there’s been dry cleaning at the site since 1939, the chances are pretty good that contamination will be found,” I said, “So even though this bank is offering you a better rate on your loan, I’d say this is your lowest ranking option.”

I continued, “Maybe you could go back to the bank that currently has the loan and accept the higher rate, or if possible, pay the loan off. Unfortunately, this  REC problem can still come back if one of your neighbors does a Phase I.” 

“A neighbor's Phase I would point to the REC at your property and it’s possible a followup Phase II would find contamination that had migrated from your property onto the neighbor's.” I told him. “I’ve seen it happen.”

“One more thing,” I said. “Let’s say down the road a tenant finds out about the REC and starts to express concern - or worse.”

Frank let out a long sigh, “Any recommendations?”

“The most immediate concern is tenant exposure. Without knowing if there is a contaminant source beneath the building, the most conservative approach is to assume there is contamination present.” I went on, “Under that scenario, I recommend analyzing air inside the unit that was formerly used for dry cleaning. You must be ready to take voluntary action If the analysis comes back indicating exposure.”

After a pause Frank ended the call, “I’ve got a lot to think about, but I appreciate your help.”

“Alright Frank, take care and let me know if I can help further,” I said.

What Does This Story Tell Us?

First, this story highlights a possible situation for owners of commercial property that was acquired before Phase I ESAs were widely used. It wasn’t until the 1980s that the “innocent landowner defense” or safe harbor linked to Phase I ESAs was recognized in the courts. Before that, landowners were not protected from contamination that occurred before their ownership - if they owned the property, they owned the contamination. Finally, it wasn’t until 1998 that the law required purchasers of a commercial property to perform a Phase I ESA that conforms to the standards of ASTM E1527-21 . Unfortunately, Frank’s family bought their commercial property prior to the wide use of Phase I ESAs.

Second, if you own or finance a commercial property, it’s important to identify and qualify the potential for contamination at your property. For example, if your strip mall is on property that was formerly a service station, a records search could provide useful information about that use of your property. WIth that information in hand, decisions concerning your property like change of use or financing can be much more informed. Alternatively, get an environmental professional’s opinion on the possibility of a REC on your site or neighboring sites and the consequences before a Phase I ESA is required for your property. 

Third, recognize what might initiate a Phase I ESA, so that you can be prepared. Some examples include:

  • Purchase of real property by a person or entity not previously on title.
  • Contemplation by a new lender to provide a loan on the subject real estate.
  • Partnership buyout or principal redistribution of ownership.
  • Application to a public agency for change of use or other discretionary land use permit.
  • Existing property owner's desire to understand the toxic history of the property.
  • Divestiture of properties 

Close

The story describes the discovery of a REC as part of a financial transaction for a family investment property and the consequences. We describe possible actions to identify the potential consequences before completing a Phase I ESA. We have the experience to identify the consequences and help you make the best possible decision. Call us at (831) 475- 8141 or click the button below.